As the global economy slowly recovers from the pandemic, we’ve seen a recent increase in inflation, particularly in the United States where annual inflation rose to 7.5% in January, the highest in over 40 years.1
Although Australia’s inflation rate has been more moderate than other advanced economies, we’re not immune to the increase. In the three months to December 2021, Australia’s Consumer Price Index (which measures household inflation) rose 1.3%, bringing annual inflation for 2021 to 3.5% which is above the Reserve Bank of Australia’s medium-term target range of 2-3% inflation.2
So, what are the implications of rising inflation and what can you do to manage your spending?
At the epicentre of the rise in inflation is the shift in the balance of demand and supply as a result of the pandemic. Household spending patterns changed over the past couple of years with restrictions and lockdowns making leisure activities (like dinner at a restaurant or tickets to a movie) difficult. Instead, households switched their spending to buying goods (like office furniture, new white goods, and home renovation supplies). This surge in demand quickly outstripped supply placing upward pressure on prices.
As we’ve become all too aware, lockdowns have also affected the transport industry, where bottlenecks started to emerge. The problems in supply chains and transportation fed off one another and compounded. This resulted in an increase in shipping costs around the world, a fall in inventories, increased delivery times and large increases in the prices of many goods.
Although inflation in Australia has increased, interest rates are still at historically low levels. Some economists are predicting the increase in inflation is only temporary and at this stage interest rates are likely to stay low for at least another six months.
This is also backed by a statement by the Board of the Reserve Bank of Australia in February 2022, where they reiterated that they “…will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.” They also said, “The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”3
Even though lockdowns and other restrictions continue to constrain the Australian economy from fully recovering, it’s hoped that booster vaccines, further reductions to restrictions and getting used to living with the virus will help return Australian businesses to a more normal footing and boost economic activity and employment. Current expectations are that the June quarter of 2022 should see the economy once again start to grow at a decent pace.
During times of increased inflation, it may be a good idea to consider how you can manage your spending while maintaining your lifestyle, especially if you’re on a fixed income. Here are some strategies you may like to consider.
There are a lot of options to weigh up when considering the impact of rising inflation on your financial situation, so make sure you do your research before making any decisions and speak to your EISS Super financial planner if you are concerned.
1 Source: Bloomberg, U.S. Inflation Charges Higher With Larger-Than-Forecast Gain (accessed 11 February 2022).
2 Source: The Conversation, Inflation hits 3.5% but one high number won’t budge the Reserve Bank on interest rates, 25 January 2022.
3 Reserve Bank of Australia, Media Release, Statement by Philip Lowe, Governor: Monetary Policy Decision, 1 February 2022.
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